LCD’s estimate of loan fund flows (8/27): -$111M Lipper/-$156M total

On Thursday, Aug. 27, outflows from loan mutual funds totaled an estimated $111 million based on the Lipper FMI universe of weekly reporters, or $156 million based on the total universe of open-ended funds plus ETFs, versus outflows of $113 million/$143 million on Wednesday, Aug. 26.

For the five business days ended Aug. 27, outflows totaled $933 million (Lipper FMI universe) and $1.21 billion (total universe plus ETFs), versus outflows of $783 million/$979 million during the five business days ended Aug. 20.


LCD compiles these data with the cooperation of a number of mutual-fund complexes. LCD is collecting daily fund-flow data for a representative sample of loan funds. We then take the weighted average AUM change each day from contributors and extrapolate it to:

  • the Lipper FMI AUM universe of $83.9 billion (as of Aug. 26) to provide a “Lipper-style” daily reading of inflows/outflows, and
  • the entire open-ended loan universe of $117 billion to give a fuller view of estimated inflows/outflows.

Halcon Resources bonds slide on latest debt exchange

Halcón Resources senior unsecured bonds dropped 12-to-14 points in active trading today after the company announced it had privately negotiated to swap some of the debt for third-lien securities, pushing the remaining senior unsecured noteholders further down the capital structure.

Halcón said in a company statement that it has agreed to issue approximately $1.02 billion of new 13% third-lien senior secured notes due 2022 in exchange for approximately $1.57 billion of unsecured debt, including $497.2 million of the 9.75% notes due 2020, $774.7 million of the 8.875% notes due 2021, and $294.3 million of the 9.25% due 2022 notes.

The 9.75% notes due 2020 notes shed more than 14 points on the news, hitting a new low of 33 on Friday, while the 9.25% notes due 2022 lost more than 13 points to a low of 32.5, and the 8.875% notes due 2021 fell to 33, from 45 at the close, according to trade data.

The recently issued 8.625% second-lien notes due 2020 were up roughly a quarter of a point to an 87 market, while shares in the name, which trade on the NYSE under the ticker HK, gained more than 16% to $1.25 by mid-morning.

Standard & Poor’s Ratings Services lowered its corporate credit rating on the company to Selective Default (SD) from B- on what it views to be a distressed exchange.

Furthermore, S&P cut its issue rating on the senior notes from CCC to D, with a recovery rating of 6, reflecting its expectation of a negligible recovery (0% to 10%) in the event of a conventional default.

The rating agency says the exchange reduces Halcón’s debt of approximately $3.65 billion by about $500 million, improving financial leverage. S&P projects debt to EBITDA to be about 4.1x at the end of 2015 and to reach 5.6x in 2016.

“Not only do these exchanges result in a material reduction to our long-term debt, they also effectively improve our leverage profile by almost a full turn and reduce our annual cash interest expense by approximately $12 million,” Halcón’s CEO Floyd Wilson said in a statement.

The company expects to close the debt exchanges within 10 business days, subject to customary closing conditions, including an amendment to its senior secured revolving credit facility that, among other things, will reduce the borrowing base by $50 million to $850 million.

Halcón currently expects the borrowing base to remain unchanged at $850 million as a result of the regularly scheduled fall re-determination.

Jefferies LLC and J.P. Morgan Securities LLC acted as placement agents to the company for the debt exchanges.

During the second quarter of 2015, Halcón entered into several exchange agreements with existing holders of senior unsecured notes in which the holders agreed to exchange an aggregate $258.0 million principal amount of their senior notes for approximately 144.8 million shares. Further details can be found  in the company’s quarterly filing. – Rachelle Kakouris


Oil & Gas issues push S&P U.S. distress ratio to 4-year high

The Standard & Poor’s U.S. distress ratio rose to 15.5% in August, its highest level in more than four years, as plunging oil prices caused spreads of Oil & Gas issues to widen considerably in the sector.

The spread expansion had a spillover effect to the broader speculative-grade spectrum. According to Standard & Poor’s, there were 191 distressed issuers with issues trading at higher than 1,000 bps, affecting total debt of about $128 billion in August, compared with 162 issuers affecting $108 billion of debt in July.

As of Aug. 14, the Oil & Gas sector had the largest proportion of distressed issues by count at 95 of the 278 issues, and one of the largest by distressed amount at 34.2%. By proportion of debt, metals, mining, and steel leads with 56%.

Distressed issuers currently have about $123 billion of outstanding bonds scheduled to mature between 2016 and 2022.

A rising distress ratio reflects an increased need for capital and is typically a precursor to more defaults when accompanied by a severe and sustained market disruption. The default rate — a lagging indicator of distress — increased to 2.21% on July 31, 2015, from 2.01% as of June 30, 2015.

The S&P/LSTA Leveraged Loan Index distressed ratio increased to 3.39% in July, from 1.06% in June. — Staff reports 


Nomura restructures credit trading and sales team

Nomura has restructured its high-yield bond and loan trading and sales groups following recent headcount cuts amid a more challenging market environment, as well as regulatory constraints impacting banks’ fixed-income desks.

The Japanese bank is bringing together its high-yield, distressed and loan trading desk to be headed up by Peter Chung, according to sources. Chung is currently executive director at Nomura’s high-yield and distressed trading desk in London.

The bank has also integrated the high-yield, investment-grade, distressed and loan sales team into one salesforce. This team will be headed up by Nick Oxlade, who currently is Nomura’s EMEA head of flow credit sales. Edward Grundy, head of high yield and distressed credit sales, is continuing to provide senior sales coverage for high yield and distressed debt.

The restructuring of the group comes after Nomura earlier this month announced a number of redundancies at its global markets business in London, which included scalebacks at its fixed income and credit default swaps divisions.

Banks are finding it increasingly challenging to generate stable income through high-yield trading as a result of Basel III capital requirements, as well as recent market volatility and bond market illiquidity, according to banking sources.

Banks’ fixed-income businesses are also hurt by the Mifid II regulation, which will require buyside clients to pay for research. Nomura’s fixed income revenues at the end of June fell by 16% year-on-year, to YEN84.1 billion. – Isabell Witt


Cruel summer: Loan bids end August in red as losses deepen

After drifting lower throughout the month, the average bid of LCD’s flow-name composite took a harsher fall in today’s reading, dropping 51 bps to 98.15% of par, versus the previous reading of 98.66 on Aug. 19.

Today’s drop is the steepest since December 2014, though note it is a week-over-week observation (the flow-names will return to the regular twice-weekly Tuesday/Thursday schedule after Labor Day).

While the flow-name composite had been steadily declining throughout August – there is not one single positive reading this month – declines accelerated in today’s reading. Equities have tumbled in very volatile trading in recent days as concerns about China’s economy have intensified.

Among the 15 names in the sample, 14 declined, and one advanced from the prior reading. Posting by far the steepest loss was the B-/B3 Avaya B-7 term loan due 2020 (L+525, 1% LIBOR floor), which is bid 3.75 points lower, at 84.25. Though there’s no news specific to the credit this week, higher-beta loans and those in out-of-favor sectors have well underperformed the broader market during this recent patch of volatility. By contrast, no other loan moved more than half a point, and excluding Avaya, the average bid would be down 28 bps.

Overall, lower-rated loans under performed: the nine loans in the sample rated B+ or higher, on average, declined 23 bps, to 99.31; the six loans rated B or lower, on average, fell 91 bps, to 96.42.

With a 0.52% drop, loans have held up well as compared with other asset classes in recent sessions. The average bid of the flow-name bond composite fell 94 bps, or 0.96%, over the week, to 96.78% of par, while even with today’s rebound, as of about 2:30 p.m. EDT, the S&P 500 had tumbled nearly 8.6% from the Aug. 19 close of 2,079.61.

Nevertheless, a 51 bps drop is nevertheless a significant move for the typically more stable loan asset class, and pushes the spread to maturity implied by the average bid out to L+430.9, which is 12.6 bps wider than a week ago, 34.7 points wider than the end of July and at its widest level since the end of December. The average bid, meanwhile, is at its lowest level since Jan. 6 (Note there have been some changes to the sample this year, so these are not apples-to-apples comparisons).

Overall, LCD’s flow-name bid declined a total of 1.51 points (1.51%) over the course of the month, down from 99.65 in the final July reading. High-yield and equities suffered a worse drubbing – the average flow-name bond composite slid 2.77 points (2.78%) during the month, while as of just after 2:30 p.m. EDT, the S&P 500 was on track to well underperform both loans and high-yield, off over 9.6% from the July 31 close of 2,103.84.

Given the wild swings in equities in recent days, arrangers and issuers will wait to see what the next 1.5 weeks bring, but the data above indicate that clearing yields are bound to widen when the primary market gets back to business after Labor Day. Market participants are also keeping a close eye on how the recent volatility – and the ensuing expectations that a September rate hike is no longer in the cards – will impact loan funds, which have seen outflows accelerate in recent days. LCD data project, per the Lipper sample of weekly reporters, for the five business days ended Aug. 25, outflows totaled $1.01 billion. As for CLOs, the recent weakness in the secondary creates a buying opportunity for managers, but liabilities could widen as well.

With the average loan bid sinking 51 bps, the average spread to maturity jumped 13 bps, to L+431.

By ratings, here’s how bids and the discounted spreads stand:

  • 99.31/L+375 to a four-year call for the nine flow names rated B+ or higher by S&P or Moody’s; STM in this category is L+371.
  • 96.42/L+535 for the six loans rated B or lower by one of the agencies; STM in this category is L+506.

Loans vs. bonds 
The average bid of LCD’s flow-name high-yield bonds plunged 94 bps, to 96.78% of par, yielding 7.65%, from 97.72 on Aug 19. The gap between the bond yield and discounted loan yield to maturity stands at 339 bps. – Staff reports

To-date numbers

  • August: The average flow-name loan decreased 150 bps from the final July reading of 99.65.
  • Year to date: The average flow-name loan increased 123 bps from the final 2014 reading of 96.92.

Loan data

  • Bids slip: The average bid of the 15 flow names tumbled 51 bps, to 98.15% of par.
  • Bid/ask spread wider: The average bid/ask spread widened one basis point, to 38 bps.
  • Spreads gain: The average spread to maturity – based on axe levels and stated amortization schedules – climbed 13 bps, to L+431.

High yield bond prices fall to 2015 low; California Resources leads decliners

The average bid of LCD’s flow-name high-yield bonds declined 94 bps in today’s reading, to 96.78% of par, yielding 7.65%, from 97.72% of par, yielding 7.42%, on Aug. 19. There were 10 decliners and just one gainer, with four of the 15 constituents unchanged.

Today’s decline comes after a modest 25 bps advance in last week’s reading, and it is the fourth decline in five readings. Take note that this is a seasonal once-a-week observation, so it’s covering five sessions, rather than three. Next week, the measurement will be also be week-over-week.

Today’s decline was led by a loss of 4.5 points on California Resources 6% notes due 2024. The rest of the decliners were each down two points or less. The negative reading incorporates several heavy sessions since last Wednesday, including Monday’s massive global market sell-off sparked by steep losses in the Shanghai Composite.

Today’s average of 96.78 marks the lowest reading of 2015. The average is down 69 bps from the Aug. 13 reading nearly two weeks ago. Dating back nearly four weeks to the July 30 reading, the average is down 277 bps. However, due to a revision in the sample, the bond bids are still up 109 bps in the year to date.

With today’s decline in the average bid price, the average yield to worst widens 23 bps, to 7.65%, and the average option-adjusted spread to worst climbed 28 bps, to T+617. Both yield and spread are at 2015 wides.

The yield and spread in today’s reading are wider than in the broad index. The S&P Dow Jones U.S. Issued High Yield Corporate Bond Index closed yesterday, Aug. 25, with a 7.29% yield-to-worst and an option-adjusted spread to worst of T+587.

For further reference, take note that a June 24, 2014 reading of 106.98 – close to the February 2014 market peak of 107.03 – had the flow-name bond average yield at 5.02%, an all-time low, but spreads weren’t quite there. Indeed, the average yield was 7.63% at the prior-cycle peak in 2007, and the average spread at the time was T+290.

Bonds vs. loans
The average bid of LCD’s flow-name loans fell 51 bps in today’s reading, to 98.15% of par, for a discounted loan yield of 4.26%. The gap between the bond yield and discounted loan yield to maturity is 339 bps. – Staff reports

The data

  • Bids rise: The average bid of the 15 flow names declined 94 bps, to 96.78.
  • Yields fall: The average yield to worst slipped 23 bps, to 7.65%.
  • Spreads tighten: The average spread to U.S. Treasuries widened 28 bps, to T+617.
  • Gainers: The sole gainer was Charter Communications 5.75% notes due 2024, which rose a quarter of a point.
  • Decliners: The 10 decliners were led by California Resources 6% notes due 2024, which slumped 4.5 points, to 69.
  • Unchanged: Four of the constituents were unchanged.

Bidders surface after rough start to high yield bond trading market

The high-yield market was under significant pressure this morning as global markets tumble in unison on global-growth concerns and China’s lack of measures over the weekend to support its stock market. However, market sources relay that buying interest surfaced in the secondary high-yield market as the morning progressed, with buyers taking advantage of the knee-jerk move lower and some short-sellers covering fast trades.

Still, the damage was apparently on a relatively illiquid August Monday. Some examples include California Resources 5.5% notes due 2021 trading a full five points lower, at 69, and Intelsat 5.5% notes due 2023 changing hands roughly two points lower, at 84.5 and 85, trade data show.

MGM Resorts International 6% notes due 2022 traded down 1.75 points, to 99, and NRG Energy 7.875% notes due 2021 changed hands half a point lower, at 101.5, the data show. Even Valeant Pharmaceuticals International 6.125% notes due 2025 traded down two full points, to 100.25.

The unfunded HY CDX 24 initially traded off 1.5 points, to 101.5, a two-year low, but has since rebounded to 103/103.25, according to Markit. – Staff reports


European high yield bond funds see €97M investor cash inflow

J.P. Morgan’s weekly analysis of European high-yield funds shows a €97 million inflow for the week ended Aug. 19. The reading includes a €8 million net inflow from ETFs, and a €17 million net outflow for short duration funds. The reading for the week ended Aug. 12 has been revised from a €93 million outflow to an €85 million outflow.

The provisional reading for July is a €272 million outflow, versus a €702 million outflow in June, with the June reading the first monthly outflow of 2015. March’s €3.1 billion influx remains the largest monthly inflow on record. January and February both registered a €1.9 billion monthly inflow, while April’s inflow was €1.4 billion, and May’s inflow was €550 million.

Inflows for 2015 through July are €8.06 billion, versus full-year inflows of €4.15 billion and €8.94 billion in 2014 and 2013, respectively.

The latest weekly inflow wipes out the previous week’s outflow, meaning there has been little change to investor cash balances recently. Fund managers comment that cash balances are typically healthy, often above 5%, which bodes well for what people hope will be a strong month of primary supply in September. In the meantime, what the market does not need is for contagion to spread from slumping equity markets across the globe, and so far this morning cash is holding up well – down around half a point – despite the 8%-plus fall in Chinese equities.

In the U.S., cash flow to high-yield funds for the week ended Aug. 19 turned positive for the first time in four weeks, at $111 million, according to Lipper. While it’s a positive reading, it barely dents the outflow total of $4.1 billion for the preceding three weeks.

The net inflow is entirely linked to the exchanged-traded fund segment, as mutual fund investors pulled $152 million this past week and ETF inflows came in at $264 million. It’s the first measure reflecting this dynamic dating back five weeks. The full-year reading stays in the red, at negative $1.5 billion, with a whopping 79% of that ETF-related. Last year, after 33 weeks, there was a larger net outflow of $3 billion, with 55% tied to ETF redemptions.

J.P. Morgan only calculates flows for funds that publish daily or weekly updates of their net asset value and total fund assets. As a result, J.P. Morgan’s weekly analysis looks at around 55 funds, with total assets under management of €38 billion. Its monthly analysis takes in a larger universe of 100 funds, with €52 billion of assets under management. For a full analysis, please see “Europe receives HY fund flow calculation.” – Luke Millar

Follow Luke on Twitter.


Oil & Gas companies account for more than a quarter of 2015 defaults

The global corporate default tally climbed to 70 issuers after two U.S.-based exploration-and-productions companies triggered a default in the past week. Oil & Gas companies now account for more than a quarter of defaults so far this year, according to a report published by Standard & Poor’s on Friday.

SandRidge Energy entered into an agreement to repurchase a portion of its senior unsecured notes ($ LCD News subscribers) at a significant discount to par, prompting S&P to lower its corporate credit rating on Aug. 14 to D, from CCC+, on what the agency considers to be a distressed transaction and “tantamount to a default”.

Samson Resources failed to make the interest payments ($) due on its $2.25 billion of 9.75% unsecured 2020 notes due Aug. 15. Standard & Poor’s subsequently lowered Samson’s corporate credit rating to D, from CCC-.

Of the 70 defaulting entities, 40 are based in the U.S., 14 in emerging markets, 12 in Europe, and 4 in the other developed nations. By default type, 22 defaulted due to missed interest or principal payments, 19 because of distressed exchanges, 14 reflected bankruptcy filings, seven were due to regulatory intervention, six were confidential defaults, one resulted from a judicial reorganization, and one came after the completion of a de facto debt-for-equity swap.

Standard & Poor’s Global Fixed Income Research estimates that the U.S. corporate trailing-12-month speculative-grade default rate will rise to 2.8% by March 2016, from 1.8% in March 2015 and 1.6% in March 2014. – Staff reports


High yield bond funds eke out $111M cash inflow, thanks to ETFs

bond funds

Cash flow to U.S. high-yield funds for the week ended Aug. 19 turned positive for the first time in four weeks, at $111 million, according to Lipper. While it’s a positive reading, it barely dents the outflow total of $4.1 billion for the preceding three weeks.

The net inflow is entirely linked to the exchanged-traded fund segment, as mutual fund investors pulled $152 million this past week and ETF inflows came in at $264 million. It’s the first measure reflecting this dynamic dating back five weeks.

Whatever that might suggest about market-timing and fast money, it’s a net inflow, but since it’s so small, the trailing-four-week average is essentially unchanged at negative $1.006 billion versus negative $1.014 billion last week.

The full-year reading stays in the red, at negative $1.5 billion, with a whopping 79% of that ETF-related. Last year, after 33 weeks, there was a larger net outflow of $3 billion, with 55% tied to ETF redemptions. Recall that last year saw the all-time record $7.1 billion outflow in the week ended Aug. 6, 2014.

The change due to market conditions this past week was mildly negative, at $269 million. That’s essentially nil against total assets, which were $191.8 billion at the end of the observation period. ETFs account for $35 billion of total assets, or roughly 18% of the sum. – Matt Fuller

Follow Matthew on Twitter @mfuller2009 for leveraged debt deal-flow, fund-flow, trading news, and more.